The first question for every small business owner who decided to form an entity? LLC or S corp? Which one is better for me?
Let’s face it, most people would chose the entity that leaves more money in their pocket. So let’s compare the tax costs and startup costs of these two entities. This assumes that the business owner is the sole owner of the business.
As a brief recap, an s corporation is a corporation that elected to be taxed as an s corporation. When you form a corporation, you are a shareholder and the corporation can distribute income to you by way of a salary or profit distributions, aka dividends. Most importantly, a corporation offers protection from personal liability for debts of the corporation.
A limited liability company offers the same protection from personal liability. As a member of an LLC, all the profit goes to you directly, you are not paying yourself a salary.
Cost of forming the Entity
|Articles of Organization: 200||Incorporation: 125|
|Expedited Handling 24 hrs: 25||Expedited Handling 24 hrs: 25|
|Certified Copy: 10||Certified Copy: 10|
|Publication in Albany: 350||Tax on 200 shares: 10|
|Total: 585||Total: 170|
So it is cheaper to form the s corporation, which is mainly due to the archaic LLC publication requirement, which serves no real purpose other than to put money into the hands of newspapers (I guess they need it) . And, unfortunately, usually the cost of publication is higher than in Albany County…in New York County it is more like $1200.
Tax Consequences of LLC v. Scorp
What about the tax situation? Does one entity cause less tax liability than the other? This is a highly fact specific question and depends on all your sources of income. But my friend and esteemed CPA Jonathan Medows did an experiment and compared the 2013 tax situation of two small business owners making $75,000 in revenue and each having $15,000 of business expenses. He came to the conclusion that it didn’t matter much whether they operated their business as an LLC or an S corp. Each had about the same personal and business tax expenses (LLC: $20,476, S corp: $20,755). Please see here for his article on the subject.
So should you run to form the s corporation? Personally, I would not go with the s corp. The upkeep of the s corp requires more paperwork and ongoing tax filing responsibilities, because you have to treat yourself as a formal employee of the corporation.